Eyes On The Prize - Opportunities For Startups As Europe Climbs The Payments League Table

John Chaplin sees opportunities and challenges for payments startupssoure - John Chaplin

Those of who live in Europe don't – on the whole - suffer from any shortage of convenient payment options. Most of us have bank accounts, allowing us pay for our goods and services not only by credit, debit and pre-payment cards but also by a range of mobile wallet options. And for those who would rather not leave a digital footprint alongside every purchase, there is always good old fashioned cash Meanwhile, online banking provides a relatively easy means for businesses and individuals and transfer cash to one another.

Outside Europe, it's a different story. Africa and Asia have become hotbeds of payment innovation, partly because the sophisticated banking in infrastructure that we take for granted in Europe and the US hasn't been universally available. Hence the emergence of African, Asian and also Latin American countries as hotbeds of payments innovation.

That hasn't stopped entrepreneurs in fintech centers, such as London from developing payments services for both the consumer and business markets, but arguably customers in Europe are already well catered for, the opportunities are more limited. In other words, it can be a tough sell.

So here's some good news for European payments entrepreneurs. According to a new report from the Global Payments Innovation Jury, factors such as a progressive approach to regulation and increased customer willingness to try out new financial services providers are boosting innovation in Europe. And while Asia still tops the global league table for payments innovation, the old continent has leapfrogged Latin America and Africa and is now ranked number two.

Jury Service

Founded by former Visa and FirstData executive John Chaplin, the Global Payments Innovation Jury is currently comprised of 70 payments company CEOs. Every two years, opinions gleaned from jury members are funneled into a report that provides a snapshot of the global industry.

And while the 2017 report sees opportunities for startups in Europe, there are also a number of significant challenges.

And one of the chief hurdles is money – or the lack of it. Fintech attracted $36bn in investment worldwide in 2016, with around a third of that going to companies in the payment and loyalty field. If that seems encouraging, the report also points to shortage of funding at the point when payments companies are seeking to scale up.

As Chaplin explains, investors are selective. “At the early stages, there is a lot of seed funding available,” he says. “But later on you begin to see differences opening up between the business-to- consumer (B2C) and business-to-business (B2B) markets.”

Scaling Up Is Hard To Do

This, he says, is largely down to the higher risks involved in growing a consumer proposition. Almost inevitably, a consumer-focused payment offer will need to scale up rapidly if it is to be profitable. That in turn will involve serious marketing spend on the acquisition of customers. The problem is that those customers may move on when a newer, brighter and shinier payment solution comes along.

And the problem facing B2C companies –and arguably this is particularly true in Europe and the US – is that a new payments solution may offer very little in terms of benefits to the consumer when compared with what's already available. Again, this makes it difficult to achieve scale.

In contrast, business-to-business payments companies can find a niche. “In the B2B space, there are more problems to solve. And businesses are prepared to pay for solutions that solve their problems," says Chaplin. Thus the Jury sees more opportunity in Europe on the B2B side.

Regulation

Business-focused payments solutions have another advantage. The Global Payments Innovation Jury cites regulation as a potential brake on growth. “Payments companies operating in the B2B marketplace are less affected by regulation," he says.

Stepping back to look at the global picture, regulation is playing a significant role in either encouraging or hampering the development of payment innovation. For instance, relatively benign regulation was one of the factors that helped Europe move up the innovation league table.

One way that startups and early stage companies can grow is by partnering with incumbents, such as banks. This is work in progress. Banks have been relatively slow to seize the initiative when it comes to getting into bed with innovative startups and early stage companies. Equally entrepreneurs might be worried about entering into partnerships that might limit their own ability to develop and grow. However, Chaplin says attitudes are changing. “The view of the jury is that partner deals are on the increase,” he says. However, at the moment much of this activity is under the radar.

Brexit Blues

For UK payments companies, the prospect of Brexit creates its own challenges. No one as yet know what Brexit will mean for the tech and fintech sectors in general but at the very least the departure of Britain from the EU is likely put up administrative and trading costs, if only because business may have to apply for both EU and UK licences. There is also a chance that the “center of gravity” of payment innovation will move away from London to other European cities.

Payments is still a field where early stage businesses can solve problems and make a difference, but the ability of a young company to thrive may well depend on its positioning, with B2C being a tougher market than B2B. And as Chaplin points out, this is a market where relatively small niche companies can thrive as can those who achieve scale. It is those in the middle who need scale but struggle to hit their growth targets that are most at risk of losing out when it comes to either raising cash or achieving a sustainable level of profitability.

I am a UK-based journalist and author with more than a decade's experience of writing about startups, tech companies and fast growth businesses. My career in journalism began as Business Editor of BBC World television's pan-European text news services. From there I went on t...